10QSB

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-QSB

x Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended July 3, 2005

¨ Transition report under Section 13 or 15(d) of the Exchange Act

For the transition period from              to             

Commission file number 0-29024

BENTHOS, INC.

(Exact Name of Small Business Issuer as Specified in Its Charter)

Massachusetts	04-2381876
(State or Other Jurisdiction of Incorporation or Organization)	(I. R. S. Employer Identification No.)

49 Edgerton Drive, North Falmouth, Massachusetts 02556

(Address of Principal Executive Offices)

508-563-1000

Issuer’s Telephone Number Including Area Code

Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:

Common Stock, par value $.06 2/3	2,100,642
(Class)	(Outstanding shares at August 10, 2005)

Transitional Small Business Disclosure Format (check one):    Yes  ¨    No  x

BENTHOS, INC. AND SUBSIDIARIES

FORM 10-QSB

FOR THE QUARTER ENDED

JUNE 30, 2005

INDEX

			Page No.
Face Sheet			1
Index			2
PART I
FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Condensed Consolidated Balance Sheets (unaudited) June 30, 2005 and September 30, 2004	3
		Condensed Consolidated Statements of Operations (unaudited) Three Months and Nine Months Ended June 30, 2005 and June 30, 2004	4
		Condensed Consolidated Statements of Cash Flows (unaudited) Nine Months Ended June 30, 2005 and June 30, 2004	5
		Notes to Financial Statements	6
	Item 2.	Management’s Discussion and Analysis or Plan of Operation	12
	Item 3.	Controls and Procedures	22
PART II
OTHER INFORMATION
	Item 6.	Exhibits	22
	Signature		22

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Benthos, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands)

(unaudited)

	June 30, 2005			September 30, 2004
Assets
Current Assets:
Cash and Cash Equivalents	$	9,513		$	241
Accounts Receivable, Net		3,343			3,565
Inventories		3,747			3,149
Prepaid Expenses and Other Current Assets		87			168
Total Current Assets		16,690			7,123
Property, Plant and Equipment, Net		1,132			1,189
Goodwill		576			576
Acquired Intangible Assets, Net		39			218
Other Assets, Net		25			35
	$	18,462		$	9,141
Liabilities and Stockholders’ Investment
Current Liabilities:
Current Portion of Long-Term Debt	$	279		$	279
Accounts Payable		1,392			1,217
Accrued Expenses		2,065			1,558
Customer Deposits		264			302
Total Current Liabilities		4,000			3,356
Long-Term Debt, Net of Current Portion		46			256
Stockholders’ Investment:
Common stock, $.06 2/3 Par Value- Authorized – 7,500 Shares Issued – 2,370 and 1,665 Shares at June 30, 2005 and September 30, 2004, respectively		158			111
Capital in Excess of Par Value		9,541			1,648
Retained Earnings		5,348			4,401
Treasury Stock, at cost– 270 shares at June 30, 2005 and September 30, 2004		(631	)		(631	)
Total Stockholders’ Investment		14,416			5,529
	$	18,462		$	9,141

See accompanying notes to Condensed Consolidated Financial Statements.

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Benthos, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(in thousands, except per share amounts)

(unaudited)

	Three Months Ended June 30,						Nine Months Ended June 30,
	2005			2004			2005			2004
Product Sales	$	6,246		$	5,442		$	16,078		$	12,476
Services		452			304			1,553			1,288
Total Net Sales		6,698			5,746			17,631			13,764
Cost of Product Sales		3,336			3,121			9,098			7,381
Cost of Services		228			215			833			770
Gross Profit		3,134			2,410			7,700			5,613
Selling, General & Administrative Expenses		1,802			1,438			4,724			3,919
Research and Development Expenses		624			430			1,580			1,224
Amortization of Acquired Intangibles		60			60			179			179
Income from Operations		648			482			1,217			291
Interest Income		20			1			20			1
Interest Expense		(7	)		(15	)		(22	)		(47	)
Income before Income Taxes		661			468			1,215			245
Provision for Income Taxes		145			12			267			12
Net Income	$	516		$	456		$	948		$	233
Basic Earnings Per Share	$	0.32		$	0.33		$	0.63		$	0.17
Diluted Earnings Per Share	$	0.29		$	0.31		$	0.56		$	0.17
Weighted Average Number of Shares Outstanding		1,637			1,383			1,480			1,383
Weighted Average Number of Shares Outstanding, Assuming Dilution		1,800			1,452			1,671			1,406

See accompanying notes to Condensed Consolidated Financial Statements.

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Benthos, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

	Nine Months Ended
	June 30, 2005			June 30, 2004
Cash Flows from Operating Activities:
Net Income	$	948		$	233
Adjustments to Reconcile Net Income to Net Cash Provided by (Used in) Operating Activities:
Depreciation and Amortization		544			730
Changes in Assets and Liabilities:
Accounts Receivable		222			(517	)
Inventories		(782	)		(21	)
Prepaid Expenses and Other Current Assets		81			14
Accounts Payable and Accrued Expenses		682			(857	)
Customer Deposits		(38	)		—
Net Cash Provided by (Used in) Operating Activities		1,657			(418	)
Cash Flows from Investing Activities:
Purchases of Property, Plant and Equipment		(115	)		(78	)
Cash Received from Sale of Real Estate		—			1,150
Net Cash (Used in) Provided by Investing Activities		(115	)		1,072
Cash Flows from Financing Activities:
Payments on Long-Term Debt		(210	)		(809	)
Proceeds from Exercise of Stock Options		256			—
Proceeds from Issuance of Common Stock		7,684			—
Net Cash Provided by (Used in) Financing Activities		7,730			(809	)
Net Increase (Decrease) in Cash and Cash Equivalents		9,272			(155	)
Cash and Cash Equivalents, Beginning of Period		241			204
Cash and Cash Equivalents, End of Period	$	9,513		$	49
Supplemental Disclosure of Cash Flow Information:
Interest Paid	$	22		$	52
Income Taxes Paid, Net	$	193		$	77
Supplemental Disclosure of Non-cash Investing Activities:
Transfer of inventory to Property, Plant and Equipment as demonstration equipment	$	667		$	647

See accompanying notes to Condensed Consolidated Financial Statements.

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Benthos, Inc. and Subsidiaries

Notes to Financial Statements

(in thousands, except per share amounts)

1. Fiscal Periods

The fiscal year of Benthos, Inc. (the Company) ends on September 30. Interim quarters are composed of 13 weeks unless otherwise noted and end on the Sunday closest to December 31, March 31, and June 30. All references in the unaudited condensed consolidated financial statements to fiscal periods ended on December 31, March 31, or June 30 mean the interim quarters referred to above.

2. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended September 30, 2004, included in the Company’s previously filed Form 10-KSB. The accompanying condensed consolidated financial statements reflect all adjustments (consisting solely of normal, recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of results for the interim periods presented. The results of operations for the interim period are not necessarily indicative of the results to be expected for the full fiscal year. Certain reclassifications have been made to the fiscal year 2004 financial statements to conform to the fiscal year 2005 presentation.

3. Public Offering

In May 2005, the Company completed a public offering of 656 shares of common stock at $13.20 per share (the “Offering”). The net proceeds of the offering, after deducting applicable issuance costs and expenses, were $7,684.

4. Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market and consist of the following:

	June 30, 2005		September 30, 2004
Raw Materials	$	224	$	235
Work-in-Process		3,497		2,806
Finished Goods		26		108
	$	3,747	$	3,149

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5. Note Receivable and Other Receivable – Real Estate

On September 29, 2003, the Company completed the sale of two parcels of real estate in Falmouth Massachusetts, called the South Side and the North Side parcels, for a total sales price of $2,500. The gross proceeds of $1,300 for the South Side parcel were received on September 30, 2003. The Company used $650 of these proceeds to repay a portion of the principal on the term loan. The proceeds for the North Side parcel were $1,150, net of $50 in commissions. The Company received these proceeds in October 2003. The Company used $600 of these proceeds to repay an additional portion of the principal on the term loan in fiscal year 2004.

6. Earnings Per Share

A reconciliation of basic and diluted shares outstanding is as follows:

	Three Months Ended June 30,		Nine Months Ended June 30,
	2005	2004	2005	2004
Basic weighted average common shares outstanding	1,637	1,383	1,480	1,383
Weighted average common share equivalents	163	69	191	23
Diluted weighted average shares outstanding	1,800	1,452	1,671	1,406

The following securities were not included in computing earnings per share because their effects would be anti-dilutive:

	Three Months Ended June 30,		Nine Months Ended June 30,
	2005	2004	2005	2004
Options to purchase common stock	40	146	17	171

7. Stock Options

At June 30, 2005, the Company had two current stock-based compensation plans in effect (one plan for employees and one plan for non-employee directors). The Company accounts for these plans under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. No stock-based employee compensation cost is reflected in net income (loss), as the options granted under these plans had an exercise price equal to, or greater than, the market value of the underlying common stock on the date of the grant.

The Company provides pro forma disclosures of compensation expense under the fair value method of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” and SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.”

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The assumptions used in computing fair value were as follows:

	Nine Months Ended June 30,
	2005		2004
Risk-free interest rate	3.78	%	3.26% - 3.96%
Expected dividend yield	—		—
Expected life (in years)	7		7
Expected volatility	71	%	60%

Had compensation cost for the Company’s stock option plans been determined using the fair value method at the grant dates, the effect on the Company’s net income and net income per share for the periods shown below would have been as follows:

	Three Months Ended June 30,						Nine Months Ended June 30,
	2005			2004			2005			2004
Net income as reported:	$	516		$	456		$	948		$	233
Add:
Stock-based employee compensation expense included in net income, net of related tax effects		—			—			—			—
Deduct:
Total stock-based employee compensation determined under fair value method for all awards, net of related tax effects		(16	)		(39	)		(46	)		(118	)
Pro forma net income	$	500		$	417		$	902		$	115
Basic income per share
As reported	$	0.32		$	0.33		$	0.63		$	0.17
Pro forma	$	0.31		$	0.30		$	0.61		$	0.08
Diluted income per share
As reported	$	0.29		$	0.31		$	0.56		$	0.17
Pro forma	$	0.29		$	0.30		$	0.54		$	0.08

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8. Segment Reporting

The Company views its operations and manages its business as two segments, Undersea Systems and Package Inspection Systems, as being strategic business units that offer different products. The Company evaluates performance of its operating segments based on revenues from external customers, income from operations and identifiable assets.

	Three Months Ended June 30,				Nine Months Ended June 30,
	2005		2004		2005		2004
Sales to Unaffiliated Customers:
Undersea Systems	$	3,773	$	3,352	$	11,344	$	8,560
Package Inspection Systems		2,925		2,394		6,287		5,204
Total	$	6,698	$	5,746	$	17,631	$	13,764
Gross Profit:
Undersea Systems	$	1,602	$	1,378	$	4,421	$	3,459
Package Inspection Systems		1,532		1,032		3,279		2,154
Total	$	3,134	$	2,410	$	7,700	$	5,613
Income (Loss) from Operations:
Undersea Systems	$	143	$	242	$	512	$	309
Package Inspection Systems		505		240		705		(18	)
Total	$	648	$	482	$	1,217	$	291
Identifiable Assets:
Undersea Systems					$	6,107	$	5,188
Package Inspection Systems						2,170		2,425
Corporate Assets						10,185		724
Total					$	18,462	$	8,337
Depreciation:
Undersea Systems	$	52	$	85	$	154	$	217
Package Inspection Systems		29		120		122		272
Corporate Assets		4		26		80		50
Total	$	85	$	231	$	356	$	539
Purchases of Fixed Assets:
Undersea Systems	$	5		13	$	22	$	48
Package Inspection Systems		2		2		16		10
Corporate Assets		9		—		77		20
Total	$	16	$	15	$	115	$	78

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Revenues by geographic area for the three and nine months ended June 30, 2005 and 2004 were as follows:

	Three Months Ended June 30,				Nine Months Ended June 30,
	2005		2004		2005		2004
Geographic Area:
United States	$	3,344	$	2,188	$	8,555	$	6,659
France		1,163		729		3,303		765
Other		2,191		2,829		5,773		6,340
Total	$	6,698	$	5,746	$	17,631	$	13,764

Revenues by product line within the Undersea Systems segment were as follows:

	Three Months Ended June 30,				Nine Months Ended June 30,
	2005		2004		2005		2004
Product Line:
Underwater Acoustics	$	1,451	$	1,268	$	4,349	$	3,503
Geophysical Exploration Equipment		1,664		1,353		4,904		2,944
Other Undersea Products		658		731		2,091		2,113
Total	$	3,773	$	3,352	$	11,344	$	8,560

The Package Inspection Systems segment has only one product line.

9. Credit Facility

The Company has a credit facility with a bank. This facility provides for loans under two notes: a $5,500 variable rate term note and a $600 variable rate line of credit. The term note is payable in 84 consecutive equal monthly installments of principal and accrues interest at prime (6.25% at June 30, 2005) plus 0.75%. The term note matures in August 2006. A final principal payment of $325 was made in July 2005 which paid the term loan in full.

The line of credit expires on January 31, 2006. Borrowings under the line of credit are payable as follows: monthly payments of interest only and unpaid principal and unpaid interest at maturity. The interest rate under the line of credit accrues at prime (6.25% at June 30, 2005) plus 0.75%. Advances are limited to 45% of eligible accounts receivable. The availability under the line of credit was $600 as of June 30, 2005. There were no advances outstanding under the line of credit as of June 30, 2005. The credit facility is secured by substantially all of the assets of the Company and requires the Company to meet certain covenants, including debt service coverage. As of June 30, 2005, the Company was in compliance with these covenants.

In July 2005, the Company renegotiated the line of credit with the bank. The available amount has been increased to $1,500 and the interest rate has been reduced to prime minus 0.50%. This line of credit expires on January 31, 2006.

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10. New Accounting Standards

In November 2004 the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 151, “Inventory Costs,” an amendment of ARB No. 43, Chapter 4. SFAS No. 151 amends the guidance in Accounting Research Bulletin (ARB) No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and spoilage. This statement requires that those items be recognized as current period charges regardless of whether they meet the criterion of “so abnormal” which was the criterion specified in ARB No. 43. In addition, this statement requires that allocation of fixed production overheads to the cost of production be based on normal capacity of the production facilities. This pronouncement is effective for the Company beginning October 1, 2005. The Company has not yet assessed the impact of adopting this new standard.

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”) which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123(R) supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends SFAS No. 95, “Statement of Cash Flows.” Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. The new standard will be effective for the Company in reporting periods beginning October 1, 2006. The Company has not yet assessed the impact of adopting this new standard.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets,” an amendment of APB Opinion No. 29, “Accounting for Nonmonetary Transactions.” The amendments made by SFAS No. 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Further, the amendments eliminate the narrow exception for nonmonetary exchanges of similar productive assets and replace it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. Previously, Opinion No. 29 required that the accounting for an exchange of a productive asset for a similar productive asset or an equivalent interest in the same or similar productive asset should be based on the recorded amount of the asset relinquished. The new standard will be effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company has not yet assessed the impact of adopting this new standard.

11. Comprehensive Income

SFAS No. 130, “Reporting Comprehensive Income,” requires disclosure of all components of comprehensive income. Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. The Company does not have any items of comprehensive income (loss) other than net income (loss).

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Item 2. Management’s Discussion and Analysis or Plan of Operation

“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995

The statements in this Quarterly Report on Form 10-QSB relating to plans, strategies, economic performance and trends and other statements that are not descriptions of historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking information is inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors which include: the timing of large project orders, competitive factors, shifts in customer demand, government spending, and economic cycles, as well as the factors described in this report. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described herein as anticipated, believed, estimated, expected or intended. Factors that may cause or contribute to such differences include, but are not limited to those discussed in more detail under “Risks Relating to Our Business” in Exhibit 99 to this Quarterly Report on Form 10-QSB.

Overview

Benthos, Inc. and its subsidiaries (the “ Company”) design, manufacture, sell and service oceanographic products and systems for underwater exploration, oil and gas development and production, research and defense, as well as electronic inspection equipment for the automated assessment of the seal integrity, fill height, and other inspection criteria of food, dairy, beverage, pharmaceutical, personal care and chemical packages. Our customers are located throughout the world.

Prior to fiscal year 2004, we experienced a decrease in sales and incurred a loss from operations during the years ended September 30, 2003 and 2002. As a result, we did not, at various times, satisfy some of the financial covenants under our line of credit and term loan agreement with our bank. We obtained waivers of these defaults and the financial covenants were amended based upon our projections for the year ended September 30, 2004. We met our financial covenants in all periods of fiscal year 2004 and for the first nine months of fiscal year 2005. While there can be no guarantee that we will attain these projections for the year ending September 30, 2005, management believes that we will meet the covenants as required by the line of credit and have sufficient cash flows from operations along with our cash balances and availability from our line of credit to fund operations.

In the three months ended June 30, 2005, we achieved sales of $6,698,000, gross profit of $3,134,000, and net income of $516,000. These results were 16.6%, 30.0%, and 13.2% improvements over the quarter ended June 30, 2004, respectively. Sales of our Undersea Systems Division were $3,773,000, up 12.6% over the third quarter of fiscal year 2004, as a result of improved market conditions and large project orders in the geophysical exploration equipment and underwater acoustics product lines. Sales of our Package Inspection Systems Division were $2,925,000, an increase of 22.2% over the third quarter of fiscal year 2004, as a result of the timing of orders. Our international sales decreased by 5.7%, with the Undersea Systems Division up by 7.8% and the Package Inspection Systems Division down by 22.3% in the third quarter of fiscal year 2005 compared to the third quarter of fiscal year 2004.

Gross profit margins improved to 46.8% of sales in the third quarter of fiscal year 2005 as compared to 41.9% in the third quarter of fiscal year 2004. The improvement in gross margins in the third quarter of fiscal year 2005 was primarily in our Package Inspection Systems Division and was a result of increased sales volume and product mix and was offset by the improved margins of our Undersea Systems Division, which has lower margins than the products of our Package Inspection Systems Division.

We see many risks and opportunities in fiscal year 2005. The U. S. and world economies, government spending, the markets served by our divisions, energy prices, competitive pressures, the value of the U.S. dollar, orders by major customers, timing of project orders, launches of new products, and other factors may have an effect on fiscal year 2005 and beyond.

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Critical Accounting Policies

The preparation of financial statements requires our management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. On an ongoing basis, management evaluates our estimates and assumptions, including but not limited to those related to revenue recognition, inventory valuation, warranty reserves, the impairment of long-lived assets, goodwill and other intangible assets, and income taxes. Management bases its estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

1. Revenue Recognition

We recognize revenue when products are shipped to customers, provided that title has passed, there are no uncertainties regarding customer acceptance, there is persuasive evidence of an arrangement, the sales price is fixed or determinable and collection of the related receivable is probable. We generally enter into arrangements for multiple deliverables when we contract to deliver a product along with providing installation services. We follow Emerging Issues Task Force (“EITF”) No. 00-21, “Revenue Arrangements with Multiple Deliverables.” Based upon the criteria contained in EITF No. 00-21, we have determined that the deliverables are separable into units of accounting. Revenue is allocated based on the relative fair values of the individual units of accounting, and we generally recognize revenue from each of these units as each unit is delivered or performed. A general right of return or cancellation does not exist once the product is delivered to the customer. We show amounts received from customers for future delivery as customer deposits in our condensed consolidated balance sheets. We account for shipping and handling fees passed on to customers as sales, and we record the corresponding costs as cost of sales.

2. Inventory Valuation

We value our inventory at the lower of actual cost or the current estimated market value. We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on historical usage for the prior twelve to twenty-four month period. Although we strive to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of our inventory and our reported operating results.

3. Warranty Reserves

Our warranties require us to repair or replace defective products returned to us during the applicable warranty period at no cost to the customer. We record an estimate for warranty-related costs based on actual historical return rates, anticipated return rates, and repair costs at the time of sale. A significant increase in product return rates, or a significant increase in the costs to repair products, could have a material adverse impact on our future operating results for the period or periods in which such returns or additional costs materialize and thereafter.

4. Goodwill

The goodwill associated with our 1999 acquisition of substantially all of the assets of Datasonics, Inc. is subject to an annual assessment for impairment by applying a fair-value based test. In the fourth quarter of fiscal year 2004, we completed a valuation of our then reported goodwill by comparing the fair value of our reporting units, as determined by an independent appraiser, to the reporting units’ then book value. The valuation indicated that the then recorded goodwill for our Undersea Systems business segment was not impaired. The valuation was based upon estimates of future income from the reporting units and estimates of the market value of the units, based on comparable recent transactions. These estimates of future income are based upon historical results, adjusted to reflect management’s best estimate of future market and operating conditions, and are periodically reviewed based on actual operating trends. Actual

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results may differ from these estimates. In addition, the relevancy of recent transactions used to establish the market value for our reporting units is based upon management’s judgment.

5. Income Taxes

We account for income taxes under the liability method in accordance with SFAS No. 109, “Accounting for Income Taxes.” Deferred tax assets and liabilities are determined based on differences between the financial reporting and income tax bases of assets and liabilities as well as net operating loss and tax credit carryforwards and are measured using the enacted tax rates and laws that will be in effect when the differences reverse. Deferred tax assets have been reduced by a valuation allowance to reflect the uncertainty associated with their ultimate realization.

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Results of Operations

Three Months Ended June 30, 2005 compared to Three Months Ended June 30, 2004

The following table presents, for the periods indicated, the percentage relationship of Condensed Consolidated Statements of Operations items to net sales:

	Three Months Ended
	June 30, 2005		June 30, 2004
Net Sales	100.0	%	100.0	%
Cost of Sales	53.2	%	58.1	%
Gross Profit	46.8	%	41.9	%
Selling, General and Administrative Expenses	26.9	%	25.0	%
Research and Development Expenses	9.3	%	7.5	%
Amortization of Acquired Intangibles	0.9	%	1.0	%
Income from Operations	9.7	%	8.4	%
Interest Income	0.3	%	—	%
Interest Expense	(0.1	)%	(0.3	)%
Income before income taxes	9.9	%	8.1	%
Provision for income taxes	2.2	%	0.2	%
Net Income	7.7	%	7.9	%

Sales. The following table shows our sales by segments:

	Three Months Ended June 30,
	2005		2004
	(In thousands)
Sales to Unaffiliated Customers:
Undersea Systems	$	3,773	$	3,352
Package Inspection Systems		2,925		2,394
Total	$	6,698	$	5,746

Net sales increased by 16.6% in the third quarter of fiscal year 2005 to $6,698,000 as compared to $5,746,000 in the third quarter of fiscal year 2004.

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The sales by product line within the Undersea Systems Division were as follows:

	Three Months Ended June 30,
	2005		2004
	(In thousands)
Product Line:
Underwater Acoustics	$	1,451	$	1,268
Geophysical Exploration Equipment		1,664		1,353
Other Undersea Products		658		731
Total	$	3,773	$	3,352

Sales of our Undersea Systems Division increased by 12.6% to $3,773,000 in the third quarter of fiscal year 2005 as compared to $3,352,000 in the third quarter of fiscal year 2004. The increase in sales was concentrated in Geophysical Exploration Equipment and Underwater Acoustics. In the Geophysical Exploration Equipment product line, sales of geophysical hydrophones for use by the oil and gas industry increased by $283,000 in the third quarter of fiscal year 2005 as compared to fiscal year 2004. This was complemented by an increase in sales of geophysical systems of $28,000 in the third quarter of fiscal year 2005 as compared to the third quarter of fiscal year 2004. In the Underwater Acoustics product line, sales of our locator products and acoustic releases increased by $193,000 in the third quarter of fiscal year 2005 as compared to the third quarter of fiscal year 2004 and was offset slightly by decreases in the sales of our commercial and government acoustic modem products of $10,000 in the third quarter of fiscal year 2005 as compared to the third quarter of fiscal year 2004. As a result of increased exploration activity, possibly related to higher energy prices, and the change in our hydrophone technology license from an exclusive to a non-exclusive basis, we believe that in 2005 and future years we will face increased competition in the geophysical hydrophone market.

Sales of our Package Inspection Systems Division increased by 22.2% to $2,925,000 in the third quarter of fiscal year 2005 as compared to $2,394,000 in the third quarter of fiscal year 2004. The increase resulted largely from the timing of orders. The Package Inspection Systems segment has only one product line.

International sales decreased by 5.7% to $3,354,000 in the third quarter of fiscal year 2005 as compared to $3,558,000 in the third quarter of fiscal year 2004. The decrease in international sales was primarily in our Package Inspection Systems Division where international sales decreased by $356,000 and was partially offset by sales of our Geophysical Exploration Equipment where international sales of geophysical hydrophones for use by the oil and gas industry increased by $204,000.

Gross Profit. Gross profit increased by 30.0% to $3,134,000 for the third quarter of fiscal year 2005 as compared to $2,410,000 for the third quarter of fiscal year 2004. Gross profit as a percentage of sales was 46.8% in the third quarter of fiscal year 2005 as compared to 41.9% in the third quarter of fiscal year 2004. The increase in gross profit as a percentage of sales was attributable primarily to improved gross margins within our Package Inspection Division resulting from increased sales volume and pricing and was partly offset by a higher mix of sales from the Undersea Systems Division which has lower margins than the Package Inspection Systems Division. We believe that gross profit as a percentage of sales for the remainder of fiscal year 2005 will not materially differ from that achieved in the first nine months of that fiscal year.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by 25.3% to $1,802,000 for the third quarter of fiscal year 2005 as compared to $1,438,000 in the third quarter of fiscal year 2004. As a percentage of sales, selling, general and administrative expenses increased to 26.9% in the third quarter of fiscal year 2005 as compared to 25.0% for the third quarter of fiscal year 2004.

16

The increase in selling, general and administrative expenses as a percentage of sales was a result of increased expenses and was partially offset by the increase in sales volume. The increase in selling, general and administrative expenses of $364,000 in the third quarter of fiscal year 2005, as compared to the third quarter of fiscal year 2004, was principally a result of increases in incentive compensation ($180,000) and profit-sharing ($34,000) accruals, and in legal and audit fees ($52,000) which included certain Sarbanes-Oxley compliance costs.

Research and Development Expenses. Research and development expenses increased 45.1% to $624,000 for the third quarter of fiscal year 2005 as compared to $430,000 in the third quarter of fiscal year 2004. As a percentage of sales, research and development expenses increased to 9.3% of sales in the third quarter of fiscal year 2005 from 7.5% in the third quarter of fiscal year 2004. The increase in the research and development expenses as a percentage of sales was primarily a result of increased spending and was partially offset by higher sales volume than in the third quarter of fiscal year 2004. Our research and development expenses in the third quarter of fiscal year 2005 were higher than in the third quarter of fiscal year 2004, as we had increased spending in new product development in both our Package Inspection Systems Division ($130,000) and on projects within our Undersea Systems Division ($64,000). We currently plan to increase spending on research and development during the remainder of fiscal year 2005.

Amortization of Acquired Intangibles. Amortization of acquired intangibles was $60,000 in each of the third quarters of fiscal years 2005 and 2004. The amortization of acquired intangibles related to the purchased technology we acquired in the Datasonics acquisition during fiscal year 1999. The remaining balance of $39,000 will be amortized in the fourth quarter of fiscal year 2005.

Interest Income. Interest income was $20,000 in the third quarter of fiscal year 2005 as compared to $1,000 in the third quarter of fiscal year 2004. The increase in interest income was a result of the investment returns on our invested cash and cash equivalents.

Interest Expense. Interest expense decreased to $7,000 in the third quarter of fiscal year 2005 as compared to $15,000 in the third quarter of fiscal year 2004. The decrease in interest expense was a result of reduced outstanding principal on the term loan.

Provision for Income Taxes. The provision for income taxes was $145,000 in the third quarter of fiscal year 2005 as compared to $12,000 in the third quarter of fiscal year 2004. Our effective tax rate was 21.9% in the third quarter of the current fiscal year. The rate in the third quarter of fiscal 2005 was lower than the statutory rate primarily as a result of the use of research and development tax credits. We have a valuation reserve of $2,000,000 related to our deferred tax assets. This reserve would reverse into income if and when the realization of the associated deferred tax assets becomes more likely than not.

Nine Months Ended June 30, 2005 compared to Nine Months Ended June 30, 2004

The following table presents, for the periods indicated, the percentage relationship of Condensed Consolidated Statements of Operations items to net sales:

	Nine Months Ended
	June 30, 2005		June 30, 2004
Net Sales	100.0	%	100.0	%
Cost of Sales	56.3	%	59.2	%
Gross Profit	43.7	%	40.8	%
Selling, General and Administrative Expenses	26.8	%	28.5	%
Research and Development Expenses	9.0	%	8.9	%
Amortization of Acquired Intangibles	1.0	%	1.3	%
Income from Operations	6.9	%	2.1	%
Interest Income	0.1	%	—	%
Interest Expense	(0.1	)%	(0.3	)%
Income before income taxes	6.9	%	1.8	%
Provision for income taxes	1.5	%	0.1	%
Net Income	5.4	%	1.7	%

17

Sales. The following table shows our sales by segments:

	Nine Months Ended June 30,
	2005		2004
	(In thousands)
Sales to Unaffiliated Customers:
Undersea Systems		11,344	$	8,560
Package Inspection Systems		6,287		5,204
Total	$	17,631	$	13,764

Net sales increased by 28.1% in the first nine months of fiscal year 2005 to $17,631,000 as compared to $13,764,000 in the first nine months of fiscal year 2004. The sales by product line within the Undersea Systems Division were as follows:

	Nine Months Ended June 30,
	2005		2004
	(In thousands)
Product Line:
Underwater Acoustics	$	4,349	$	3,503
Geophysical Exploration Equipment		4,904		2,944
Other Undersea Products		2,091		2,113
Total	$	11,344	$	8,560

Sales of our Undersea Systems Division increased by 32.5% to $11,344,000 in the first nine months of fiscal year 2005 as compared to $8,560,000 in the first nine months of fiscal year 2004. The increase in sales was primarily concentrated in Geophysical Exploration Equipment and Underwater Acoustics. In the Geophysical Exploration Equipment product line, sales of geophysical hydrophones for use by the oil and gas industry increased by $1,763,000 in the first nine months of fiscal year 2005 as compared to fiscal year 2004. This was also complemented by an increase in sales of geophysical systems of $197,000 in the first nine months of fiscal year 2005 as compared to the first nine months of fiscal year 2004. In the Underwater Acoustics product line, sales of our commercial and government acoustic modem products increased by $507,000 in the first nine months of fiscal year 2005 as compared to the first nine months of fiscal year 2004 and was complemented by increases in the sales of our acoustic releases of $338,000 in the first nine months of fiscal year 2005 as compared to the first nine months of fiscal year 2004. As a result of increased exploration activity, possibly related to higher energy prices, and the change in our hydrophone

18

technology license from an exclusive to a non-exclusive basis, we believe that in 2005 and future years we will face increased competition in the geophysical hydrophone market.

Sales of our Package Inspection Systems Division increased by 20.8% to $6,287,000 in the first nine months of fiscal year 2005 as compared to $5,204,000 in the first nine months of fiscal year 2004. The increase resulted largely from the timing of orders. The Package Inspection Systems segment has only one product line.

International sales increased by 27.7% to $9,076,000 in the first nine months of fiscal year 2005 as compared to $7,105,000 in the first nine months of fiscal year 2004. The increase in international sales was primarily in Geophysical Exploration Equipment where international sales of geophysical hydrophones for use by the oil and gas industry increased by $1,838,000 and in our Package Inspection Systems Division where international sales increased by $236,000, and was partially offset by decreases in other areas.

Gross Profit. Gross profit increased by 37.2% to $7,700,000 for the first nine months of fiscal year 2005 as compared to $5,613,000 for the first nine months of fiscal year 2004. As a percentage of sales, gross profit was 43.7% in the first nine months of fiscal year 2005 as compared to 40.8% in the first nine months of fiscal year 2004. The increase in gross profit as a percentage of sales was attributable primarily to improved gross margins within our Package Inspection Division resulting from increased sales volume and pricing and was partly offset by a higher mix of sales from our Undersea Systems Division which has lower margins than the Package Inspection Systems Division. We believe that gross profit as a percentage of sales for the remainder of fiscal year 2005 will not materially differ from that achieved in the first nine months of that fiscal year.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by 20.5% to $4,724,000 for the first nine months of fiscal year 2005 as compared to $3,919,000 in the first nine months of fiscal year 2004. As a percentage of sales, selling, general and administrative expenses decreased to 26.8% in the first nine months of fiscal year 2005 as compared to 28.5% for the first nine months of fiscal year 2004. The decrease in selling, general and administrative expenses as a percentage of sales was a result of increased sales volume, partially offset by higher expenses The increase in selling, general and administrative expenses of $805,000 in the first nine months of fiscal year 2005, as compared to the first nine months of fiscal year 2004, was principally a result of increases in incentive compensation ($359,000) and profit-sharing ($79,000) accruals, in expenses related to our evaluation of our strategic alternatives ($99,000) that resulted in our public offering of common stock in May 2005, and in legal and audit fees ($153,000) which included certain Sarbanes-Oxley compliance costs.

Research and Development Expenses. Research and development expenses increased 29.1% to $1,580,000 for the first nine months of fiscal year 2005 as compared to $1,224,000 in the first nine months of fiscal year 2004. As a percentage of sales, research and development expenses increased to 9.0% of sales in the first nine months of fiscal year 2005 from 8.9% in the first nine months of fiscal year 2004. The increase in the research and development expenses as a percentage of sales was primarily a result of higher spending in the first nine months of fiscal year 2005 and was partially offset by higher sales volume than in the first nine months of fiscal year 2004. The spending on research and development expenses in the first nine months of fiscal year 2005 was $356,000 higher than in the first nine months of fiscal year 2004, as we had increased spending in new product development in our Package Inspection Systems Division ($316,000) and on projects within our Undersea Systems Division ($40,000). We currently plan to increase spending on research and development during the remainder of fiscal year 2005.

Amortization of Acquired Intangibles. Amortization of acquired intangibles was $179,000 in each of the first nine months of fiscal years 2005 and 2004. The amortization of acquired intangibles related to the purchased technology we acquired in the Datasonics acquisition during fiscal year 1999. The remaining balance of $39,000 will be amortized in the fourth quarter of fiscal year 2005.

Interest Income. Interest income was $20,000 in the first nine months of fiscal year 2005 as compared to $1,000 in the first nine months of fiscal year 2004. The increase in interest income was a result of the investment returns on our cash and cash equivalents.

19

Interest Expense. Interest expense decreased to $22,000 in the first nine months of fiscal year 2005 as compared to $47,000 in the first nine months of fiscal year 2004. The decrease in interest expense was a result of reduced outstanding principal on the term loan.

Provision for Income Taxes. The provision for income taxes was $267,000 in the first nine months of fiscal year 2005 as compared to $12,000 in the first nine months of fiscal year 2004. The 2005 effective tax rate was 22.0%. The rate in the first nine months of fiscal 2005 was lower than the statutory rate primarily as a result of the use of research and development tax credits. We have a valuation reserve of $2,000,000 related to our deferred tax assets. This reserve would reverse into income if and when the realization of the associated assets becomes more likely than not.

Liquidity and Capital Resources

Cash Flows for the Nine Months Ended June 30, 2005. Our cash and cash equivalents increased $9,272,000 from September 30, 2004 to June 30, 2005. The following table presents, for the nine months ended June 30, 2005, the cash generated and used in our operations:

	Generated		Used
	(In thousands)
Depreciation and amortization (non cash)	$	544	$	—
Decrease in accounts receivable		222		—
Net income		948		—
Decrease in prepaid expenses and other current assets		81		—
Decrease in customer deposits		—		(38	)
Increase in accounts payable and accrued expenses		682		—
Increase in inventories		—		(782	)
Total	$	2,477	$	(820	)

Cash Generated	$	2,477
Cash Used		(820	)
Total provided by operations	$	1,657

Cash of $1,657,000 was provided by operating activities, primarily the result of the net income achieved during the first nine months of $948,000, increases in accrued expenses of $507,000, decreases in accounts receivable of $222,000, increases in accounts payable of $175,000, decreases in prepaid expenses and other current assets of $81,000, increases in customer deposits of $51,000 and depreciation and amortization of $544,000. These sources were partially offset by decreases in customer deposits of $38,000, and an increase in inventory of $782,000 (which included $667,000 transferred to property, plant and equipment as demonstration equipment and $751,000 generated from the sale of demonstration equipment). We believe that our ability to maintain positive cash flow from operations in the future is primarily related to our ability to maintain our operating profits, maintain collection of accounts receivable through strict adherence to payment terms, maintain inventories by matching deliveries closer to scheduled shipment dates for our products, and manage accounts payable to vendors.

The Company used $115,000 of cash in its investing activities, primarily for purchases of property, plant and equipment.

Financing activities provided $7,730,000 of cash. Financing activities included $7,684,000 in proceeds from the issuance of common stock in our offering, and proceeds of $256,000 from the exercise of stock

20

options, partially offset by the payment of $210,000 on the term loan. We do not have any significant contractual obligations or commercial commitments.

Credit Facility. We have a credit facility with a bank. This facility provides for loans under two notes: a $5,500,000 variable rate term note and a $600,000 variable rate line of credit. The term note is payable in 84 consecutive equal monthly installments of principal and accrues interest at prime (6.25% at June 30, 2005) plus 0.75%. The term note matures in August 2006. Principal payments under the term note would have been $70,000 for the remainder of fiscal year 2005 and $255,000 in fiscal year 2006. A final principal payment of $325,000 was made in July 2005 which repaid the term loan in full.

The line of credit expires on January 31, 2006. Borrowings under the line of credit are payable as follows: monthly payments of interest only and unpaid principal and unpaid interest at maturity. Borrowings under the line of credit accrue interest at prime (6.25% at June 30, 2005) plus 0.75%. Advances are limited to 45% of eligible accounts receivable. The availability under the line of credit was $600,000 as of June 30, 2005. There were no advances outstanding under the line of credit as of June 30, 2005. The credit facility is secured by substantially all of our assets and requires us to meet certain covenants, including debt service coverage. As of June 30, 2005, we were in compliance with these covenants.

In July 2005, we renegotiated the line of credit with the bank. The available amount has been increased to $1,500,000 and the interest rate has been reduced to prime minus 0.50%. This line of credit expires on January 31, 2006.

During the 12 months ended June 30, 2005, we generated $1,735,000 of cash from operating activities. We believe that we will have sufficient cash from operating activities, cash balances, our existing line of credit and other potential financing sources to continue operations for the next 12 months.

21

Item 3. Controls and Procedures

The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified within the Commission’s rules and forms, and that such information is accumulated and communicated to its management to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was necessarily required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of its chief executive officer and chief financial officer, of the effectiveness of the design and operation of its disclosure controls and procedures to meet the criteria referred to above. Based on the foregoing, its chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were effective.

Part II — OTHER INFORMATION

Items 1 – 5. Not Applicable.

Item 6. Exhibits

The exhibits set forth in the Exhibit Index on the following page are filed herewith (or incorporated by reference to the Company’s previous filings) as a part of this report.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

BENTHOS, INC.
By	/s/ Francis E. Dunne, Jr.
	Francis E. Dunne, Jr.
	Vice President, Chief Financial Officer,
	and Treasurer
	(Principal Financial and Accounting Officer)

DATE: August 16, 2005

22

EXHIBIT INDEX

BENTHOS, INC.

Exhibit No.	Description
3.1	Restated Articles of Organization(1)
3.2	Articles of Amendment dated April 28, 1997(2)
3.3	Articles of Amendment dated April 20, 1998(5)
3.4	By-Laws(1)
3.5	By-Law Amendments adopted January 23, 1998(4)
10.1	Employment Contract with Samuel O. Raymond(1)
10.2	Third Amendment to Employment Contract with Samuel O. Raymond(2)
10.3	Fourth Amendment to Employment Agreement with Samuel O. Raymond(14)
10.4	Amended and Restated Employment Agreement with Francis E. Dunne, Jr.(17)
10.5	Amended and Restated Employment Agreement with James R. Kearbey(17)
10.6	Employment Agreement between the Company and Francois Leroy(17)
10.7	Employment Agreement between the Company and Richard B. Martin(19)
10.8	Benthos, Inc. Fiscal Year 2005 Incentive Compensation Matrix(17)
10.9	Employee Stock Ownership Plan(1)
10.10	First Amendment to Employee Stock Ownership Plan(2)
10.11	Second Amendment to Employee Stock Ownership Plan(7)
10.12	Third Amendment to Employee Stock Ownership Plan(7)
10.13	Fourth Amendment to Employee Stock Ownership Plan(9)
10.14	Fifth Amendment to Employee Stock Ownership Plan(9)
10.15	Amendment to Benthos, Inc. Employee Stock Ownership Plan dated July 19, 2004(16)
10.16	Benthos, Inc. Employee Stock Ownership Plan as Amended and Restated Effective as of October 1, 2002(12)
10.17	Benthos, Inc. 401(k) Retirement Plan dated March 2004(15)

10.18	Supplemental Executive Retirement Plan(1)
10.19	1990 Stock Option Plan(1)
10.20	1994 Stock Option Plan for Non-Employee Directors(1)
10.21	1998 Non-Employee Directors’ Stock Option Plan(4)
10.22	Benthos, Inc. 2000 Stock Incentive Plan(8)
10.23	Credit Agreement between the Company and Cape Cod Bank and Trust Company dated August 18, 1999(7)
10.24	First Amendment to Credit Agreement dated March 23, 2001(10)
10.25	Second Amendment to Credit Agreement dated December 12, 2001(11)
10.26	Third Amendment to Credit Agreement dated January 29, 2003(13)
10.27	Fourth Amendment to Credit Agreement dated November 3, 2003(14)
10.28	Fifth Amendment to Credit Agreement dated January 7, 2004(15)
10.29	Sixth Amendment to Credit Agreement dated December 20, 2004(18)
10.30	Seventh Amendment to Credit Agreement dated July 8, 2005(20)
10.31	License Agreement between the Company and Optikos Corporation dated July 29, 1997(3)
10.32	Hydrophone License Agreement between the Company and Sercel, Inc. (formerly Syntron, Inc.) dated December 5, 1996(6)
10.33	Amendment Number 1 to Hydrophone License Agreement between the Company and Sercel, Inc. (formerly Syntron, Inc.) dated September 11, 1998(6)
10.34	Agreement among the Company, Samuel O. Raymond and the Samuel O. Raymond 1996 Irrevocable Insurance Trust dated July 24, 2003(14)
10.35	License Agreement with Simon Fraser University dated September 1, 2000(15)
10.36	Amendment No. 1 to Simon Fraser License Agreement dated March 15, 2004(15)
10.37	Contract with University of Wisconsin-Madison(15)
10.38	License Agreement with Woods Hole Oceanographic Institution dated as of August 18, 2004(16)
21	Subsidiaries of the Registrant(12)
31.1	Section 302 Certification of Chief Executive Officer

31.2	Section 302 Certification of Chief Financial Officer
32	Section 1350 Certifications
99	Risk Factors

(1) Previously filed as an exhibit to the Registrant’s Registration Statement on Form 10-SB filed with the Commission on December 17, 1996 (File No. 0-29024) and incorporated herein by this reference.

(2) Previously filed as an exhibit to the Registrant’s Quarterly Report on Form 10-QSB for the quarterly period ended March 30, 1997 (File No. 0-29024) and incorporated herein by this reference.

(3) Previously filed as an exhibit to the Registrant’s Quarterly Report on Form 10-QSB for the quarterly period ended June 29, 1997 (File No. 0-29024) and incorporated herein by this reference.

(4) Previously filed as an exhibit to the Registrant’s Quarterly Report on Form 10-QSB for the quarterly period ended December 31, 1997 (File No. 0-29024) and incorporated herein by this reference.

(5) Previously filed as an exhibit to the Registrant’s Quarterly Report on Form 10-QSB for the quarterly period ended March 31, 1998 (File No. 0-29024) and incorporated herein by this reference.

(6) Previously filed as an exhibit to the Registrant’s Quarterly Report on Form 10-QSB for the quarterly period ended December 31, 1998 (File No. 0-29024) and incorporated herein by this reference.

(7) Previously filed as an exhibit to Registrant’s Annual Report on Form 10-KSB for the fiscal year ended September 30, 1999 (File No. 0-29024) and incorporated herein by this reference.

(8) Previously filed as an exhibit to the Registrant’s definitive proxy statement filed on Schedule 14A on or about January 18, 2000 and incorporated herein by this reference.

(9) Previously filed as an exhibit to the Registrant’s Quarterly Report on Form 10-QSB for the quarterly period ended June 30, 2000 (File No. 0-29024) and incorporated herein by this reference.

(10) Previously filed as an exhibit to the Registrant’s Quarterly Report on Form 10-QSB for the quarterly period ended March 31, 2001 (File No. 0-29024) and incorporated herein by this reference.

(11) Previously filed as an exhibit to the Registrant’s Quarterly Report on Form 10-QSB for the quarterly period ended December 31, 2001 (File No. 0-29024) and incorporated herein by this reference.

(12) Previously filed as an exhibit to the Registrant’s Annual Report on Form 10-KSB for the fiscal year ended September 30, 2002 (File No. 0-29024) and incorporated herein by this reference.

(13) Previously filed as an exhibit to the Registrant’s Quarterly Report on Form 10-QSB for the quarterly period ended March 31, 2003 (File No. 0-29024) and incorporated herein by this reference.

(14) Previously filed as an exhibit to the Registrant’s Annual Report on Form 10-KSB for the fiscal year ended September 30, 2003 (File No. 0-29024) and incorporated herein by this reference.

(15) Previously filed as an exhibit to the Registrant’s Quarterly Report on Form 10-QSB for the quarterly period ended June 30, 2004 (File No. 0-29024) and incorporated herein by this reference.

(16) Previously filed as an exhibit to the Registrant’s Annual Report on Form 10-KSB for the fiscal year ended September 30, 2004 (File No. 0-29024) and incorporated herein by this reference.

(17) Previously filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on or about January 24, 2005 (File No. 0-29024) and incorporated herein by this reference.

(18) Previously filed as an exhibit to the Registrant’s Quarterly Report on Form 10-QSB for the quarterly period ended December 31, 2004 (File No. 0-2904) and incorporated herein by this reference.

(19) Previously filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on or about June 30, 2005 (File No. 0-2904) and incorporated herein by this reference.

(20) Previously filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on or about July 8, 2005 (File No. 0-2904) and incorporated herein by this reference.

EX-31.1

EXHIBIT 31.1

Section 302 Certification

I, Ronald L. Marsiglio, certify that:

1. I have reviewed this quarterly report on Form 10-QSB of Benthos, Inc., a Massachusetts corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;

4. The small business issuer’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Evaluated the effectiveness of the small business issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

c. Disclosed in this report any change in the small business issuer’s internal controls over financial reporting that occurred during the most recent fiscal quarter that has materially affected or is reasonably likely to materially affect, the small business issuer’s internal control over financial reporting; and

5. The small business issuer’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer’s auditors and the audit committee of the small business issuer’s board of directors:

a. All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the small business issuer’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal control over financial reporting.

Dated: August 16, 2005

/S/ RONALD L. MARSIGLIO

Ronald L. Marsiglio

President and Chief Executive Officer

EX-31.2

EXHIBIT 31.2

Section 302 Certification

I, Francis E. Dunne, Jr., certify that:

1. I have reviewed this quarterly report on Form 10-QSB of Benthos, Inc., a Massachusetts corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

5. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;

6. The small business issuer’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Evaluated the effectiveness of the small business issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

c. Disclosed in this report any change in the small business issuer’s internal controls over financial reporting that occurred during the most recent fiscal quarter that has materially affected or is reasonably likely to materially affect, the small business issuer’s internal control over financial reporting; and

5. The small business issuer’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer’s auditors and the audit committee of the small business issuer’s board of directors:

a. All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the small business issuer’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal control over financial reporting.

Dated: August 16, 2005

/S/ FRANCIS E. DUNNE, JR.

Francis E. Dunne, Jr.

Vice President, Chief Financial Officer,
and Treasurer

EX-32

EXHIBIT 32

WRITTEN STATEMENT

OF

CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

The undersigned hereby certify that, to the best of the knowledge of the undersigned, the Quarterly Report on Form 10-QSB for the period ended July 3, 2005 filed by Benthos, Inc. with the Securities and Exchange Commission fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the issuer.

Dated: August 16, 2005

/s/ RONALD L. MARSIGLIO

Ronald L. Marsiglio

President and Chief Executive Officer

/s/ FRANCIS E. DUNNE, JR.

Francis E. Dunne, Jr.

Vice President, Chief Financial Officer and Treasurer

EX-99

Exhibit 99

RISK FACTORS

Risks Relating to Our Business

We are dependent on major customers.

During our fiscal year ended September 30, 2004, two customers of our Undersea Systems Division, the U.S. Government (consisting of contracts and orders with various agencies) and Sercel, Inc. (a subsidiary of Compagnie Generale de Geophysique SA), represented approximately 14% and 13% of our net sales, respectively, and for the nine months ended June 30, 2005, those customers represented approximately 11% and 20%, respectively, of our net sales. During our fiscal year ended September 30, 2003, U.S. Government contracts represented approximately 10% of our net sales. During our fiscal year ended September 30, 2002, Sea and Land Technologies, a former distributor/sales representative of our Undersea Systems Division, represented approximately 13% of our net sales. Except for those customers, no single customer represented more than 10% of our net sales in any of our three most recently completed fiscal years. However, a loss of any of our current major customers would have an adverse effect on our business.

Under our arrangement with Sercel, Inc., we currently have a non-exclusive worldwide license to use certain technology owned by Sercel that allows us to manufacture our GeoPoint hydrophones. During the first three years of the license, we had the exclusive right to manufacture the hydrophones using the licensed technology. Several years ago, the license converted from an exclusive license to a nonexclusive license. The term of the license has expired, but we, as licensee, have the right to continue to use the licensed technology to make, distribute, use and sell the licensed product. Subject to our retained right, Sercel as the owner of the licensed technology also has the right to use the licensed technology to make, distribute, use and sell the licensed product. Sercel is one of our largest customers (approximately 13% and 20%, respectively, of our net sales in fiscal 2004 and the nine months ended June 30, 2005), and substantially all of our revenues from Sercel consist of sales of hydrophones. Due to the current high level of activity in the oil and gas exploration industry, Sercel has advised us that it is seeking to develop a second source of supply for GeoPoint hydrophones. Should Sercel develop an alternative source of GeoPoint hydrophone production, some or all of our GeoPoint hydrophone sales to Sercel could be replaced by that new source. If Sercel discontinued purchasing GeoPoint hydrophones from us, our sales would decline to the extent that we were unable to replace such sales to Sercel with sales to other customers. Furthermore, if Sercel were to use the licensed technology to manufacture its own hydrophones, we could become a competitor with one of our major customers with respect to hydrophones.

A significant portion of our business is dependent on the oil and gas exploration industry.

We derived approximately 17%, 5% and 8% of our net sales during our fiscal years ended September 30, 2004, 2003 and 2002, and approximately 23% of our net sales during the first nine months of our 2005 fiscal year, from sales of products (primarily hydrophones) to companies engaged in oil and gas exploration or supplying products to companies engaged in that industry. We anticipate deriving a significant portion of our future business from sales of products related to oil and gas exploration. The oil and gas exploration industry is cyclical and expenditures vary significantly over different periods based primarily on the then price and anticipated price for oil and gas products. Any significant decline in the aggregate amount of expenditures by the oil and gas exploration industry would adversely affect our business, financial condition and results of operations.

We face significant competition.

We have a variety of competitors in our various product markets. Certain of our markets, such as glass flotation and geophysical hydrophones, are relatively small and the number of competitors is limited. In other

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markets, such as remotely operated vehicles, or ROVs, and systems and package inspection systems, the market is larger and we compete with a significant number of well-established companies that have significantly more resources than ours. We compete on the basis of product performance, features, quality, reliability and price and on our ability to manufacture and deliver our products on a timely basis. We may not be able to compete successfully in the future against existing or new competitors. In addition, competitive pressures may force us to reduce our prices, which could negatively affect our operating results. If we do not respond adequately to competitive challenges, our business and results of operations would be harmed.

We are subject to risks associated with international sales.

We derived 48.6%, 30.3% and 38.1% of our net sales during our fiscal years ended September 30, 2004, 2003 and 2002, and 51.5% of our net sales during the first nine months of our 2005 fiscal year, from international sales (primarily to Canada, Europe and Asia). We anticipate deriving a significant portion of our future business from international sales. Our international sales expose us to various risks including:

• potentially adverse changes in the political or economic conditions in countries or regions where we sell our products,

• compliance with multiple and potentially conflicting regulatory requirements including export requirements, tariffs and other trade barriers,

• longer accounts receivable collection periods, and

• differing protection of intellectual property.

In addition, to the extent that we price such sales in foreign currencies, we are subject to the risk of fluctuations in exchange rates, although we have traditionally priced our international sales in U.S. dollars in order to avoid such risks.

The portion of our net sales which consists of payments for research and development we perform for customers is dependent on government authorizations.

We derived approximately 8%, 4%, and 4% of our net sales during our fiscal years ended September 30, 2004, 2003 and 2002, and approximately 6% of our net sales during the first nine months of our 2005 fiscal year, from payments made by U.S. Government agencies, or prime contractors for such agencies, to finance research and development activities on their behalf. We anticipate deriving a portion of our future business from research and development activities funded by such customers. Much of such research and development activities relate to development of products in the acoustic area. The level of such funded research and development is therefore dependent upon governmental appropriations to fund research and development in the relatively small acoustic research area. Following the attack on the World Trade Center on September 11, 2001, the aggregate payments which we received for such research and development activities during our fiscal year ended September 30, 2002 decreased by approximately 37% from the amount of such payments we received during our fiscal year ended September 30, 2001. Our fiscal year ended September 30, 2004 is the first fiscal year during which the aggregate amount of the payments we received for funded research and development exceeded the amount we received during our 2001 fiscal year.

We are subject to risks associated with government contracts.

We derived 13.7%, 10.1% and 9.7% of our net sales during our fiscal years ended September 30, 2004, 2003 and 2002, and 10.6% of our net sales during the first nine months of our 2005 fiscal year, from government procurement contracts with U.S. Government agencies, primarily the U.S. Navy. We anticipate deriving a significant portion of our future business from government contracts. Such business is subject to risks arising from regulations applicable to U.S. Government contracts. Under those regulations, we often must participate in competitive bidding in order to obtain such contracts and some contracts (or the full implementation of such

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contracts) are subject to the agency involved being able to obtain sufficient funding through subsequent appropriations. The regulations also provide the government agency involved with extensive termination and audit rights. In the event of termination by that agency, we will only be able to recover costs incurred or committed, settlement expenses and profit on the work completed prior to termination. Based on audits of such contracts, the U.S. Government may adjust our contract-related costs and fees, and some of our costs, including most financing costs, portions of research and development costs and certain marketing expenses, may not be recoverable. Further, as a U.S. Government contractor, we are subject to investigation, legal action and/or liability that would not apply to a contract with a commercial customer.

We are subject to risks related to compliance with and changes in governmental regulations.

Federal Aviation Administration approval is required for our locator pingers and state X-ray standards apply for certain of our Package Inspection Systems Division products. Sale of pingers and Package Inspection Systems Division products subject to such government regulations represented 5.2% and 3.0% of our net sales for the fiscal year ended September 30, 2004. Certain products of our Undersea Systems Division cannot be sold to restricted countries under U.S. export controls, and certain of our hydrophone products must conform to regulations that limit the ability of the hydrophones to be utilized for military applications. While we believe that such export controls have not to date had a significant adverse effect on our net sales, compliance with them increases the cost and delay associated with sale of those products to foreign customers.

Our business involves rapidly evolving products and technological change.

Rapid change of technology is a key feature of all of the markets in which our divisions operate. To succeed in the future, we will need to continue to design, develop, manufacture, assemble, test, market and support new products and enhancements on a timely and cost-effective basis. Historically, our technology has been developed through customer-funded and internally-funded research and development and through business acquisitions. We may not be able in the future to continue to maintain comparable levels of research and development or successfully complete such acquisitions. In the past we have allocated substantial funds to capital expenditures, programs and other investments, and we will be required to continue to do so in the future. Even so, we may not be able to successfully identify new opportunities and may not have the needed financial resources to develop new products in a timely or cost-effective manner. Products and technologies developed by others may also render our products and systems obsolete or non-competitive and, in such event, we would need to write off a portion of the inventory which we maintain or have contractual commitments to acquire. Any of these events would adversely affect our financial condition and results of operations.

Our products could contain defects which would increase our costs and harm our business.

Certain of our products, especially our geophysical sonar products, are inherently complex in design, and their manufacture involves highly complex and precise processes. As a result of the technical complexity of these products, design defects, changes in manufacturing processes or the inadvertent use of defective materials could adversely affect our manufacturing yields and product reliability, which could in turn harm our business operating results, financial condition and customer relationships. For example, early in fiscal year 2004 we delayed our launch of certain new products in our Package Inspection Systems Division because of design problems which we then identified.

We provide warranties for our products and accrue allowances for estimated warranty costs at the time we recognize revenue from the sale of the products. We determine the amount of such allowances through estimates of product return rates and expected costs to repair or replace the products under warranty based on our historical experience. If actual return rates or repair and replacement costs differ significantly from our estimates, we may be required to make adjustments to recognize additional cost of sales in future periods.

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Our customers may discover defects in our products after the products have been fully deployed and operated under peak stress conditions. In addition, some of our products are combined with products from other suppliers, which may contain defects. As a result, should problems occur, it may be difficult to identify the source of the problem. If we are unable to identify and fix defects or other problems, we could suffer loss of customers, increased costs of product returns and warranty expenses, damage to our brand reputation, diversion of development and engineering resources or legal actions. Any one or more of the foregoing could seriously harm our business, financial condition and results of operations.

Our operating results are difficult to predict, and if we fail to meet the expectations of investors, the market price of our common stock could decline significantly.

Our operating results from quarter to quarter have fluctuated and will likely continue to fluctuate. These fluctuations are typically unpredictable and result from factors such as:

• changes in our customers’ capital spending,

• industry cyclicality (particularly in the oil and gas exploration industry),

• levels of government funding available to our customers and other economic conditions within the markets we serve,

• the level of orders within a given quarter and preceding quarters,

• the timing and level of cancellations and delays of orders for our products,

• the timing of product shipments within a given quarter,

• timing of new product introductions by us and our competitors,

• changes in our pricing policies or in the pricing policies of our competitors or suppliers,

• market acceptance of any new or enhanced versions of our products,

• our ability to manufacture a sufficient quantity of our products to meet customer demand,

• our level of expenses, and

• the impact of newly promulgated accounting pronouncements.

We may in the future elect to change prices, increase spending, or add or eliminate products in response to actions by competitors in an effort to pursue new market opportunities. These actions may also adversely affect our business and operating results and may cause our quarterly results to be lower than the results of previous quarters.

In addition, we often recognize a substantial portion of our sales in the last month of the quarter. Thus, unexpected variations in timing of sales, particularly for our higher-priced, higher-margin products such as our Package Inspection Systems Division products, can cause significant fluctuations in our quarterly operating results. Orders expected in one quarter can shift to another period due to changes in the anticipated timing of customers’ purchase decisions or rescheduled delivery dates requested by our customers or the failure by customers to make agreed prepayments when scheduled. Our operating results for a particular quarter or year may be adversely affected if our customers, particularly our largest customers, cancel or reschedule orders, or if we cannot fill orders in time due to unexpected delays in manufacturing, testing, shipping, and product acceptance. Also, we base our manufacturing on our forecasted product mix for the quarter. If the actual product mix varies significantly from our forecast, we may not be able to fill some orders during that quarter, which would result in delays in the shipment of our products and could shift sales to a subsequent period. In addition, if sales are below expectations in any given quarter, the adverse impact of the shortfall on our operating results may be magnified by our inability to adjust spending quickly to compensate for the shortfall.

Due to these and other factors, we believe that quarter-to-quarter comparisons of results from operations, or any other similar period-to-period comparisons, should not be construed as reliable indicators of our future performance. In any period, our results may be below the expectations of investors, which would likely cause the trading price of our common stock to drop.

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Because the sales cycle for some of our products is long and difficult to predict, and certain of our orders are subject to rescheduling or cancellation, we may experience fluctuations in our operating results.

Many of our capital equipment, system and subsystem products are complex, and customers for these products require substantial time to make purchase decisions. These customers often perform, or require us to perform, extensive configuration, testing and evaluation of our products before committing to purchase them. The sales cycle for our capital equipment, system and subsystem products from initial contact through shipment typically varies, is difficult to predict and can last as long as one year. The orders constituting our backlog are often subject to cancellation and changes in delivery schedules by our customers without significant penalty. We have from time to time experienced order rescheduling and cancellations that have caused our net sales in a given period to be materially less than would have been expected based on our backlog at the beginning of the period. If we experience such rescheduling and/or cancellations in the future, our operating results will fluctuate from period to period. These fluctuations could harm our results of operations and cause our stock price to decline.

We may in the future experience intellectual property infringement claims, which could be costly and time-consuming to defend.

Although we have not in any recent years received communications from third parties alleging that we are infringing trademarks, patents or other intellectual property rights held by them, it is possible that we may receive such claims in the future. Any claims of infringement brought by third parties could result in protracted and costly litigation, and we could become subject to damages for infringement, or to an injunction preventing us from selling one or more of our products or using one or more of our trademarks. Such claims could also result in the necessity of obtaining a license relating to one or more of our products or current or future technologies, which may not be available on commercially reasonable terms or at all. Any intellectual property litigation and the failure to obtain necessary license or other rights or develop substitute technology may divert management’s attention from other matters and could have a material adverse effect on our business, financial condition and results of operations. In addition, the terms of certain customer contracts require us to indemnify the customer in the event of any claim or infringement brought by a third party based on our products. Any such claims of this kind may have a material adverse effect on our business, financial condition or results of operations.

If we fail to protect our intellectual property and proprietary technology, we may lose our competitive advantage.

Our success and ability to compete depend in large part upon protecting our proprietary technology. We rely on a combination of patent, trademark and trade secret protection and nondisclosure agreements to protect our proprietary rights. The steps we have taken may not be sufficient to prevent the misappropriation of our intellectual property, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. The patent and trademark law and trade secret protection may not be adequate to deter third party infringement or misappropriation of our patents, trademarks and other proprietary rights. In addition, patents issued to us may be challenged, invalidated or circumvented. Our rights granted under those patents may not provide competitive advantages to us, and the claims under our patent applications may not be allowed. The process of seeking patent protection can be time consuming and expensive and patents may not be issued from currently pending or future applications. Moreover, our existing patents or any new patents that may be issued may not be sufficient in scope or strength to provide meaningful protection or any commercial advantage to us. Although we have not done so in the past, we may in the future initiate claims or litigation against third parties for infringement of our proprietary rights in order to determine the scope and validity of our proprietary rights or the proprietary rights of our competitors. Any such claims could result in costly litigation, the diversion of our technical and management personnel and the assertion of counterclaims by the defendants, including counterclaims asserting invalidity of our patents.

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If we are unable to attract new employees and retain and motivate existing employees, our business and results of operations will suffer.

Our ability to maintain and grow our business is directly related to the service of our employees in each area of our operations. Our future performance will be directly tied to our ability to employ, train, motivate and retain qualified personnel. Competition for personnel in our industry segments is intense, and housing and other living costs in the geographic area where our facility is located are higher than in the geographical areas where the facilities of many of our major competitors are located. If we are unable to employ sufficient employees with the experience and skills we need or to retain our employees, our business and results of operations would be harmed.

We will incur substantial costs and uncertainties associated with the Sarbanes-Oxley Act.

Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules adopted by the Securities and Exchange Commission and the Public Company Accounting Oversight Board will require us to include in our annual report on Form 10-KSB filed with the SEC for each of our fiscal years commencing with the year ending September 30, 2006, reports by our management and by the independent registered public accounting firm which audits our financial statements as to the effectiveness of our internal control over financial reporting. If our management and independent registered public accounting firm determine that any “material weakness” exists in our internal control over financial reporting as of the end of the relevant fiscal year, they would be precluded from finding that our internal control is then “effective.” We anticipate incurring during our fiscal year ending September 30, 2005, approximately $150,000 of expenses in connection with documentation and testing of our internal control over financial reporting. These expenses are expected to be significantly greater in subsequent fiscal years, although the timing and amount of these expenditures will largely depend on regulatory developments.

Section 404 of the Sarbanes-Oxley Act and the related rules adopted by the SEC and the Public Company Accounting Oversight Board are fairly new and involve significant uncertainties concerning how they will be applied to smaller publicly-held companies such as Benthos. Accordingly, there is considerable uncertainty as to whether our management and independent registered public accounting firm will be able to conclude that our internal control over financial reporting is effective. If our management and independent registered public

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accounting firm were unable to determine that our internal control over financial reporting is effective, this could have an adverse effect upon the market price of our common stock.

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